Trends in organizational purchasing - Marketing Management

These trends are important in the sense that they have potentially significant implications for the development of marketing strategies and plans. However, three of these trends in organizational purchasing are felt to have been particularly important in this respect, and are now considered in more detail.

Just in Time purchasing

Originally devised in America, but first applied in the Toyota Company in Japan, many manufacturing companies have moved towards a system of manufacturing based on having parts and components for production in stock and available when, and only when, they are required by the production line or unit. For obvious reasons this system of manufacturing and inventory control has come to be termed Just in Time (JIT) although a more formal term is ‘lean manufacturing’.

Used extensively in Japan for many years, it has now made major inroads into manufacturing companies in Western economies. A definition of JIT by Dion et al.19 explains the meaning of JIT and captures its essential features: an inventory control system which delivers input to its production or distribution site only at the rate and time it is needed. Thus it reduces inventories whether it is used within the firm or as a mechanism regulating the flow of products between adjacent firms in the distribution system channel. It is a ‘pull’ system which replaces buffer inventories with channel member co-operation.

Companies realize that holding stock, including stock for production or sale, is costly. Not only is capital tied up, but there are potential costs in stockholding: for example, extra staff needed as stores personnel, pilferage, damage, changes in customer demand or product specification which renders stock obsolete. A JIT system aims to minimize stockholding and associated costs by supplying raw materials and component parts for production just at the time they are needed.

The consequence of such a system for suppliers is that they must be able to provide parts and components on a continuous basis, typically within a four-hour time window, to consignees. In turn, this means there must be a close working relationship and exchange of information between customers and suppliers and to this end, as Lancaster20 points out, close associations must be developed between marketer and customers.

JIT purchasing is the main factor underpinning the growth of ‘relationship marketing’. In addition to the need for close working relationships between suppliers and customers, supplying on a JIT basis increases the importance of effective distribution and logistical systems on the part of marketers. We consider some of the impacts of JIT on this element of marketing in Chapter 6 on logistics. The introduction of JIT purchasing by a customer means a reduction in supplier numbers, normally one for each item being supplied, and often with increasing numbers of parts being purchased from outside rather than being manufactured internally.

In a properly synchronized JIT system customer demands can be met and profits maintained or increased through a reduction in stockpiles and inventory levels. An accounting rule of thumb says: ‘on average the cost of holding stock can add 25 per cent to the costs of materials and component parts’.

There are however some drawbacks to JIT, principally through the need for synchronization. Suppliers might have commitments to other customers, so causing delays. A company’s industrial relations must be excellent, which is why the first Japanese car manufacturer to set up in the UK (Nissan at Sunderland) insisted on single trade union representation with a ‘no strike’ clause written into workers’ agreements, because to operate a successful JIT system means no downtime on the production line and the acceptance of flexible work routines.

Zero defects

Zero defects is closely related to JIT purchasing. The need for zero defects and reliable quality on the part of the supplier is critical as components are incorporated into the manufacturing process almost immediately following delivery. There is no time to test components or inspect for defective supplies. End customers demand totally consistent quality and this has pushed the need for quality back down the chain of manufacture and supply to involve all the different companies in the production and supply chain. For example, the Jaguar Motor Company in the 1970s, when experiencing substantial loss of market share and falling profits (particularly in export markets) due to the supply of poor quality components, turned the situation round by insisting on improved quality from their suppliers. Early recognition of the importance of quality, however, has now moved on with many companies now implementing and operating total quality management (TQM) systems.

Lancaster21 has shown that companies must focus on the total product quality of their goods to differentiate themselves from the opposition. JIT purchasing means that components and supplies must be ‘right first time’. In the 1960s and 1970s it was typically sufficient to ensure that defects were within controllable and acceptable levels when supplying customers. Customers now insist that there must be no defects in supply. This has revolutionized manufacturing, quality control, design, marketing and logistics systems.

B2B markets

In business to business (B2B) markets, customer satisfaction is an evaluation by purchasers of suppliers, based on supply and consumption experience. The customer is the ultimate judge of supplier performance. Therefore, the organizational marketer has to ascertain how customers evaluate and hence choose between suppliers and in particular what, from the perspective of the customer, constitutes good and bad supplier performance. Business customers are becoming much more sophisticated in their supplier evaluation and selection systems. A study by Marzouk22 illustrates just how sophisticated these systems can be.

He proposes a model which allows a supplier-ranking process using a range of preference structures which can be used to rank potential suppliers with regard to the extent to which they have the required skills, resources and abilities. As our earlier discussion of the decision-making unit shows, different functional areas have different criteria that determine their evaluation and selection of different suppliers. Engineers, for example, use different criteria with suppliers than purchasing or manufacturing personnel. In assessing the industrial buyers’ perceptions of quality and satisfaction one must look at the buying group and not just the purchasing function.

Despite these differences in perceptions of what constitutes supplier performance, there is no doubt that most organizations understand the importance of effective supplier evaluation and performance. A study by Cormican and Cunningham23 shows how careful supplier selection can result in increased quality, reduced lead times and a reduction in the number of defects.

E-commerce and organizational buying

A major development affecting marketers in recent years has been the development of electronic commerce. E-commerce has major implications for marketing practice and it embraces a range of techniques and procedures for conducting business electronically. It is the use of electronic technologies and systems to facilitate and enhance transactions between different parts of the value chain. The value chain stretches from primary production of raw materials to the end customer, as opposed to the supply chain which stretches from the end product manufacturer to the primary source of supply. Just to complete this explanation the demand chain stretches from the end product manufacturer to the end customer, so the value chain is represented by the demand chain plus the supply chain.

One of the first applications of e-commerce was in the area of B2B marketing. In the 1980s companies began to use computers as a matter of course in purchasing and supply. Eventually, this developed into systems whereby suppliers and buyers could readily exchange information through linked computer systems.

This developed into full electronic-data-interchange (EDI) systems which offer advantages to both parties in the transaction. For example, in the customer’s company, when stocks reach a pre-ordained minimum level an automatic order is sent via the computer to the supplier’s company whose computerized systems will in turn set in train the complete sequence of actions required to fulfil the customer’s order. EDI systems are now so widely used in B2B markets that often suppliers are selected by a computer. All major motor companies in the world insist that their suppliers supply on an EDI basis with Japanese companies being at the forefront of this development.

Continuing the trend towards more and more electronically based systems, companies now have extranet systems that go further than linking just suppliers and buyers, as they seek to link together all members of the value chain including suppliers’ suppliers and distributors and intermediaries. The extranet allows closer and more sophisticated relationships to be developed between the members of the value chain as it requires access to, and use of information between, members of the chain. This requires trust and commitment between all members.

We have discussed the main influences and processes of buyer behaviour in consumer and organizational markets, and examined some of the key trends and developments particularly regarding JIT purchasing, zero defects and the growth of e-commerce in B2B markets. This text is based upon a strategic as well as a tactical marketing outlook, so it is worth re-examining the application of strategic marketing concepts and assessing the insights that understanding buyer behaviour can offer.